Real Estate return enhancement los 26.f

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itsmclovin

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In Schweser book 4, SS 13, p 20 it states:
(Real estate)
“High risk-adjusted performance is possible because of the low liquidity, large lot sizes, immobility, high transaction costs and low transparency that usually means the seller knows more than the buyer”
Could someone explain to me how these above factors incease risk-adjusted return? Intuitively these factors would seem to increase risks, and decrease returns.
Thanks!
 
Not certain, but I believe that they are implying that the investors are more than compensated for these risks with higher returns because many people refuse to even enter the market because of such risks.
 
risk adjusted returns refers to measures like sharpe and jensen’s alpha. think of the sharpe ratio: because of the factors listed it could be difficult to get a true picture of the riskiness or standard deviation of that asset class. consider the NCREIF index which is based on actual property values (not REITS). along with the issues in the original post, properties are valued infrequently and a low standard deviation generally results (lower than what it should be for that asset class) giving rise to high risk adjusted returns. smoothed data is often the case with actual property standard deviations which lead to unusually low standard deviations and seemingly good risk adjusted returns
 
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